Here’s why 2015 was a lousy year for IPOs

Square ended its first day of trading with a $13.07, a 45 percent
pop. It has fallen a bit since then but is still trading about 37
percent above its IPO price.

Photo: Richard Drew / Richard Drew / Associated Press

Except for health care companies, 2015 was a lousy year for initial public offerings, which help fuel the Bay Area economy and top off state coffers.

Nationwide, only 170 companies went public compared with 275 last year. They raised a total of $30 billion, the lowest since 2009, according to Renaissance Capital, which manages IPO-focused exchange traded funds.

In the Bay Area, only 26 companies went public, raising a total of $3.7 billion compared with 35 deals totaling $4.75 billion last year. There were no blockbusters like Facebook’s $16 billion offering in 2012 or Twitter’s $1.8 billion IPO in 2013. The largest Bay Area deal this year was Fitbit, which raised $731 million.

Performance-wise, the Class of 2015 was also a disappointment. The average Bay Area IPO is virtually unchanged from its offering price and down 16.6 percent from its first-day close, through Friday.

By comparison, Bay Area companies that went public last year closed out 2014 with a 48 percent average gain from their IPO price and a 17.6 percent increase from their first-day close.

Started with gusto

The IPO market started the year with gusto, “but went into a tailspin in August and September that wiped out positive performance, drove abnormally high IPO discounts and brought issuance to a near halt by year-end,” Renaissance said in a report. Although the broader stock market bounced back from its late-summer swoon, IPOs did not.

It didn’t help when a few high-profile deals did not perform well. After Pure Storage went public in October and posted a first-day close below its offering price, a number of other prominent companies — including Safeway owner Albertsons and Neiman Marcus — shelved their IPOs indefinitely.

Issuance has also been hurt by the growing availability of private capital. “Mutual funds, hedge funds, people who might typically invest in public companies, are moving up and investing in startups at the late stage,” said Nikhil Krishnan, a tech analyst with CB Insights. That allows companies to stay private longer.

Sometimes too long.

When Square finally went public in mid-November, it priced at $9 per share, 25 percent below the midpoint of its expected range. That gave the San Francisco company a lower market value than implied by its two previous rounds of private funding. “That’s what it took to get it trading positively,” said Kathleen Smith, a principal with Renaissance.

Square ended its first day of trading at $13.07 per share, a 45 percent pop. It has fallen a bit since then but is still trading about 37 percent above its IPO price.

Smith believes other companies are in the same boat. “One reason for the (IPO) slowdown, we think, is that many companies would have to price below their last private round of financing,” she said. That’s known as a down round, and “it’s a big disappointment to all the startup companies who always assumed the IPO was done at a higher price. 2015 is a wake-up call that that’s not the case and the (IPO) window is not open at all times.”

Biotech fared well

From an issuance standpoint, the standout sector was health care, primarily biotech companies. They accounted for 46 percent of this year’s IPOs versus 37 percent in 2014 and just 9 percent in 2012.

In terms of performance, however, health care was a mixed bag. These companies occupied nine of the top 10 spots — and eight of the bottom 10. On average, the sector was down 2.9 percent year to date. That was in line with the nationwide IPO market, which was down 3.1 percent from its offering price.

While there were plenty of disappointments this year, there were also some winners, even late in the year. One example is Atlassian, an Australian company with an office in San Francisco that makes business-collaboration software. It’s growing fast and has good profit margins, Krishnan said. It went public on Dec. 9 at $21 per share, above its expected range, and is now trading at $29.35.

“There will always be fundamentally good businesses to invest in, you will always have these knockouts like Atlassian pop up on the radar,” Smith said.

Looking ahead to next year, she predicts that “there will be more discipline put into the funding market for startups because the normal avenue for exit is that much more difficult.”

Andy Boyd, head of global equity capital markets for Fidelity Investments, predicts there will be more “liquidity events” for private companies next year, both IPOs and sales.

“I think it will be a little harder to raise private capital next year,” he said. That will likely lead to more IPOs.

But, he added, “I think some of these companies will not want to do an IPO because it will be a down round and they will look to sell.”

When companies go public, it frees up money that early investors can plow back into more startups. Successful IPOs encourage such risk-taking. Large IPOs, like Google and Facebook, have produced noticeable surges in state income tax revenue, as investors and employees cash in their stock and options.

Although a prolonged IPO drought could negatively impact the Bay Area economy, there is no sign of that yet.

“The Bay Area had roaring job growth, as good in 2015 as it was in 2014, and way above the state and national averages,” said Steven Levy, director of the Center for Continuing Study of the California Economy.

And it looks like 2015 will be the second-highest year for venture capital funding since at least 1995, according to a MoneyTree report.

Kathleen Pender writes the Net Worth column in The San Francisco Chronicle. She explains how the big business and economic news of the day affect a household's net worth. She covers saving, investing, debt, taxes, housing, mortgages, retirement plans, employment and unemployment with a focus on issues specific to California and the Bay Area.

When it comes to big financial decisions, she believes that the simplest answer is almost always the best and that people would stay out of money trouble if they didn't get involved in things they can't understand. Pender welcomes questions from readers and frequently answers them in her column.

She majored in business journalism at the University of Missouri-Columbia and was a Knight-Bagehot fellow in business journalism at Columbia University.